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Bank reporting Where is your ‘LIBOR’?
Banks routinely report volumes of data to a multitude of external stakeholders including investors and other financial market participants, regulators or the general public. The LIBOR scandal has demonstrated the consequences of inadequate controls over the reliability of this important information. How certain can banks’ management be that there isn’t another ‘LIBOR’ somewhere amidst this myriad of reporting?
The pace and volume of regulatory change and the trend towards more transparency have increased banks’ reporting obligations. These requirements vary in nature and include periodic, formal, standardised reporting such as financial reporting and regulatory returns, real-time reporting of data on transactions and positions and ad hoc requests from regulators (see inset box for a non-exhaustive list). At the same time, the financial crisis has heightened the sensitivity to and scrutiny of the quality of banks’ reporting by regulators and other stakeholders. In addition to scrutiny by regulators, there is also the prospect of more public reporting for banks to contend with. While the nature, frequency and formality of reporting differs by requirement and subject matter, the common factor is that banks’ stakeholders rely on the information being produced
and there are often wider systemic implications of the quality and timeliness of reported data. Most reported information is not subject to independent verification so its accuracy is entirely reliant upon banks’ internal controls. Furthermore, as was alleged with the submission of LIBOR rates, in some cases institutions and/or personnel responsible for producing and approving reported data may
have incentives to misreport. Clearly the LIBOR example has come to the forefront but banks’ management and those who rely on information provided by banks would be mistaken to assume that there are not similar risks elsewhere.
this is susceptible to deliberate manipulation and it is not difficult to envisage the financial gain that one may seek to derive from such behaviour. Facilitating market transparency Amongst the post-crisis measures taken by regulators. similar processes are employed for establishing other rates. indices. This area is still developing but it is clear that the global nature of OTC markets and the number of asset-classes that operate within these markets is leading to a proliferation of TRs. In addition to these. in thinly traded or less observable markets). including unaudited sections Market transparency • Transaction reporting to the FSA under SUP 17 • MiFID II: pre and post trade transparency (real time publishing of orders/quotes) transaction reporting • EMIR: reporting to facilitate central clearing and OTC trade data repositories • Complex derivative position reporting to regulators • Reporting under UK and EU short selling regulations • Dodd-Frank – real time public reporting of derivatives transactions • UKLA disclosure and transparency rules (DTR) Reporting performance Trading desks employ a process for marking their books which uses a mechanism not too dissimilar from LIBOR. Unchecked. The introduction of tougher capital and liquidity measures emanating from Basel III and. but also in the pricing of various types of financial contracts between counter-parties. brings with it more onerous reporting requirements (in the form of COREP. With all this new reporting. The reliability of this pricing information is highly dependent on the validity and faithfulness of the estimates submitted by that bank and its peers to form the composite estimate.g. loans. FINREP and liquidity reporting requirements). COREP. Suspicious activity reporting) • Remuneration Other • Bank of England statistical reporting • Submissions to pricing services and index providers • Reporting to taxation authorities (HMRC. A similar degree of reliance on banks’ systems of reporting is inherent in performance indices. to TRs no later than the following working day. the establishment of trade repositories (TRs) to collect data on over-the-counter (OTC) derivative transactions is one that will significantly affect banks’ reporting requirements. review and submission of quotes would fail to prevent erroneous reporting. and prices such as those in the physical energy and precious metals markets. Designed to facilitate greater market transparency. will require banks to report all OTC derivative contracts. perceptions of banks’ safety and soundness are also an influencing factor in the current environment. there is a risk that poor controls over the generation. Indices reflecting the performance of hedge funds. in Europe. the greater the likelihood of either duplicate or unreported transactions by banks. It has been well publicised that this was one possible incentive behind the reporting of inter-bank borrowing rates – a key measure of a bank’s health. . The level of attention prudential returns receive from regulators has increased significantly. External benchmarks from consensus pricing services are often used either as a reference point or a direct source for pricing securities in a bank’s inventory. the following are some further examples illustrating the potential for misreporting of information by banks.A myriad of reporting by banks Prudential/financial • Regulatory returns (FSA.g. IRS) Reporting on safety and soundness In addition to direct financial gain as a motivation behind banks’ reporting. The more complex this infrastructure. the UK’s Financial Policy Committee is recommending more and earlier disclosures of prudential measures such as the leverage ratio and reconciliation of accounting and regulatory measures of capital. this new regulation (brought into Europe through the European Market Infrastructure Regulation or ‘EMIR’). Where the raw quotes submitted to index providers are more subjective (e. etc.) Where can it go wrong? In addition to LIBOR and other benchmark interest rates. there must be sufficiently robust processes and controls in place such that management and the board can be assured that returns and disclosures are free from misstatement – deliberate or otherwise. the forthcoming CRD IV. • Pillar III reporting • Recovery and resolution planning submissions • Annual/interim reports. In addition to these forthcoming standardised reports. which will require close monitoring and control by management. and modifications thereof. Conduct of business • FSA product sales data • Anti-money laundering reporting (e. commodities and other asset classes are used not only for benchmarking.
Are governance processes and internal controls adequate? Only with knowledge of this risk profile can boards execute effective governance over reporting. design and operation of effective controls that ensure the accuracy and timeliness of reporting. • Regulatory enforcement action results in financial penalties which are demonstrably increasing in magnitude. systems and controls who can help you by: 1 2 3 Cataloguing the bank’s external reporting obligations and assisting in evaluating the risks and risk appetite in light of emerging issues. remuneration and reputations are at stake when reporting for which they are responsible is inaccurate. ensuring the right degree of control around subjective estimates and facilitating avenues of escalation where issues arise. This includes overseeing the implementation. . boards need to ensure they are fostering a culture conducive to integrity. processes and controls in specific reporting areas considered higher risk. the financial ramifications of redress and legal costs could be significant. • Where misreporting is detrimental to banks’ counter-parties or customers. reporting. • In this environment of increasing personal responsibility and accountability.What are the risks? Unreliable reporting has a financial impact. boards should be asking themselves the following questions: Where are the risks and what is the risk appetite? Boards should be aware of all of the institution’s external reporting obligations and have sufficient information to gauge which are the most risky in terms of the propensity to get it wrong and the associated consequences. risk management. governance. systems. • More indirectly. Is the bank’s culture and ‘tone at the top’ appropriate? Given the range of incentives associated with certain types of banks’ reporting. banks suffer reputation damage which has commercial consequences when stakeholders are misled through reporting. individuals’ careers. Considering and advising on the role of compliance. Providing advice or assurance on data. What should the board focus on? In light of the heightened profile of banks’ reporting. honesty and transparency in reporting. transparency. internal audit and the bank’s governance committees in gaining assurance on the accuracy of reporting. governance and culture. What PwC can do to help? PwC has an unparalleled team of financial services industry experts in data.
firstname.lastname@example.org/structure for further details.com Rob Konowalchuk +44 (0) 207 212 2410 robert.x.References PwC has subject matter experts and offers services across a broad spectrum of regulatory reporting.konowalchuk@uk. Each member firm is a separate legal entity. along with contact details of the PwC people who can help.pwc.pwc. All rights email@example.com Ben Higgin +44 (0) 207 213 3901 ben. In this document.com © 2012 PricewaterhouseCoopers LLP.com www. www..pwc.pwc.pwc. 120806-111209-RK-OS .co.. EMIR May 2012 All clear? EU introduces clearing and reporting regime for OTC derivatives July 2012 COREP Common European Regulatory Reporting FINREP Regulatory Reporting of Financial Information Liquidity reporting Regulatory reporting of Basel III liquidity measures EMIR EU introduces clearing and reporting regime for OTC derivatives Contacts Gilly Lord +44 (0) 207 804 8123 gillian.pwc.pwc.com www.pwc. “PwC” refers to the UK member firm.com www. Other topical areas are referenced below.uk COREP Common European Regulatory Reporting How ready are you? FINREP Regulatory Reporting of Financial Information How ready are you? June 2012 April 2012 So you think you are ready for Basel III liquidity reporting? Think again . and may sometimes refer to the PwC network. Please see www.
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